First Financial Bancorp's CEO Discusses Q2 2012 Results - Earnings Call Transcript

First Financial Bancorp. (FFBC)

Q2 2012 Earnings Call

July 25, 2012 09:00 am ET

Executives

Claude Davis – President & Chief Executive Officer

Frank Hall – Executive Vice President, Chief Financial Officer & Chief Operating Officer

Ken Lubbock – Vice President of Investor Relations and Corporate Development

Analysts

Scott Siefers – Sandler O’Neill & Partners

Chris McGratty – Keefe Bruyette & Woods

Jon Arfstrom – RBC Capital Markets

Emlen Harmon – Jefferies & Co.

Bryce Rowe – Robert W. Baird & Co.

Kenneth James – Sterne Agee & Leach

Presentation

Operator

Good morning and welcome to the First Financial Bancorp Q2 2012 Earnings Conference Call. (Operator instructions.) Please note this event is being recorded. I would now like to turn the conference over to Ken Lubbock, Vice President of Investor Relations and Corporate Development. Please go ahead.

Ken Lubbock

Thank you, Valerie. Good morning everyone and thank you for joining us on today’s conference call to discuss First Financial Bancorp’s Q2 2012 financial results. Discussing our operating and financial results today will be Claude Davis, President and Chief Executive Officer; and Frank Hall, Executive Vice President, Chief Financial Officer and Chief Operating Officer.

Before we get started I would like to mention that both the press release we issued yesterday announcing our financial results for the quarter and the accompanying supplemental presentation are available on our website at www.bankatfirst.com under the Investor Relations section. Please refer to the forward-looking statement disclosure contained in the Q2 2012 earnings release as well as our SEC filings for a full discussion of the company’s risk factors.

The information we provide today is accurate as of June 30, 2012, and we will not be updating any forward-looking statements to reflect facts or circumstances after this call. I will now turn the call over to Claude Davis.

Claude Davis

Great, thanks Ken, and thanks to all of you who have joined the call today. We are pleased to announce another quarter of solid performance, reporting net income of $17.8 million or $0.30 per diluted common share. Return on average assets was 1.13% and return on average equity was 9.98% for the quarter.

The results were impacted by two one-time items during the quarter. First, we recognized $2.2 million of nonrecurring expenses on a pre-tax basis or $0.02 per share, primarily related to expenses associated with our branch consolidation plan. We also recognized a pre-tax gain of $5 million associated with the settlement of litigation related to a subsidiary which impacted earnings per share by $0.05. Earnings were also affected by the provision for loan losses related to our uncovered loan portfolio which increased $5.1 million compared to the linked quarter.

We paid our third variable dividend during the quarter, representing a 100% dividend payout ratio based on our Q4 2011 reported earnings per share of $0.31, and while not reflected in Q2’s reported results, we paid our fourth variable dividend earlier this month based on Q1’s reported earnings per share of $0.29. Our next quarterly dividend will consist of a regular dividend of $0.15 per share and a variable dividend of $0.15 per share based on Q2’s earnings of $0.30, the announced dividend results and a current yield of 7.4% based on yesterday’s closing price of $16.21. As we mentioned last quarter we intend to continue paying the variable dividend through 2013 unless our capital position changes materially or capital deployment opportunities arise that cause our capital ratios to move to our stated thresholds sooner than expected.

As of June 30, our tangible counter ratio was 9.91%, Tier 1 leverage was 10.21%, and total risk-based capital was 18.42%. Our ratios continue to remain well in excess of our stated thresholds of a tangible ratio of 7%, Tier 1 leverage of 8% and total capital of 13%. Our strong capital ratios still have the ability to support significant growth and under the most constraining of our thresholds have capacity to support approximately $1.6 billion in additional assets under current regulatory capital standards.

With regard to the [MPR] related Basel III capital standards, while the proposed rules are not final we performed a preliminary analysis under several scenarios and determined that our capital levels are still well in excess of the proposed guidelines. As we manage capital going forward we are obviously in a wait and see period until the new capital guidelines are finalized. Once those guidelines are finalized we will perform a thorough analysis to determine whether or not our stated thresholds are still appropriate.

Total class by assets continued to improve, declining for the seventh consecutive quarter, and are down $9.1 million or 5.9% compared to the linked quarter; and down $39.2 million or 21% compared to June 30, 2011. Net charge offs related to uncovered loans totaled $6.8 million or 93 basis points of average loan balances during the quarter, a slight increase over the linked quarter.

Contributing to the quarterly total was $2 million related to the residual balances of two nonperforming credits sold to third parties. Total nonperforming loans to total loans decreased slightly to 2.76% as of June 30 from 2.79% as of March 31. As I noted earlier, our provision for loan losses related to uncovered loans increased $5.1 million during the quarter to $8.4 million. The provision expense is a byproduct of our internal model used to estimate the period end allowance for loan losses. The increase in the provision for the quarter was driven primarily from having to establish or add to specific reserves totaling $6.1 million in the aggregate related to three separate larger credits in our commercial and commercial real estate portfolios.

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